ALFALFAL, Chile (Reuters) - Banks backing an embattled $2.5 billion hydroelectric project in Chile have privately expressed concern about the environmental management practices of companies building the complex, internal documents show.
The documents, prepared by Washington-based auditor Environmental Resources Management at the banks’ request, call into question the environmental stewardship of contractors Strabag, Hochtief, and Italy’s CMC di Ravenna at AES Gener’s Alto Maipo hydroelectric project throughout 2016 and part of 2015.
According to the audits, which were conducted throughout 2016, Alto Maipo is “mostly compliant” with the environmental and social demands of the lenders. But the documents also show that the banks expressed concern about elements of compliance at the project.
During a site visit, “as well as subsequently, the Lenders emphasized their concerns regarding the continued delays in compliance and achievement that persist with some relevant items that are being considered to be ‘In Progress,’” read an October 2016 audit, referring to a visit by banks to Alto Maipo.
CMC and Hochtief together formed a consortium known as CNM and were removed from the project in June for what AES Gener told Reuters without elaborating were “various breaches of the construction contract.”
CMC did not respond to requests for comment. Hochtief and Strabag declined to comment.
During the fourth quarter of 2015, “it was identified that there is disconnect between (Alto Maipo’s) strong commitment to (environmental, social, health, and safety principles) and those of the Contractors,” a June 2016 audit report said. The reports seen by Reuters are among the most recently published.
Although the reports from the auditor do not specify which issues in particular drew concern from the banks, the documents detail several examples of spotty compliance with environmental permits or lenders’ demands.
For instance, one report published in February 2017 notes that 2016 audits carried out by the project’s equity stakeholders found seven “non-conformances” by the contractors with regard to their environmental permits.
Among the “non-conformances,” the reports say, were “inadequate containment” of hazardous material near a river that drains into Santiago and storing hazardous material over a facility’s capacity.
A report published in June 2016 said waste water treatment plants, which cleanse the water extracted from the process of creating tunnels, had overflown at certain locations.
In one of the reports, dated October, the auditor said the banks suggested the monitoring system of harmful particles in worker-occupied tunnels be improved. “Any results from the existing medical health check,” the auditor said, “would be too late to mitigate the impacts.”
AES Gener said all such specific issues had either been clarified or addressed. The banks, in their statement, said such issues “are not unusual for a project of this nature and magnitude,” and that “Alto Maipo has made and continues to make progress in its efforts to address these issues.”
The audit findings come as some local citizens, activists and politicians say the project is too big a risk for the ecologically sensitive mountain valleys where it is being built.
“You can see the destruction they’ve brought here,” said Ruben Arenas, a resident of the once-rustic mountain town of Alfalfal, which is now completely fenced in by a massive construction site.
The project includes two power plants and a vast array of tunnels running deep underneath the Andes Mountains. Developers have framed the 531-megawatt project - a significant portion of which will supply the Los Pelambres copper mine, owned by mining company Antofagasta - as vital for feeding Chile’s energy needs, while activists and many local citizens say it could harm the region’s forests and rivers.
In a statement, AES Gener emphasized it has several mechanisms in place to ensure compliance with local laws and the stringent standards of the development banks behind the projects, and that the banks have continued supporting Alto Maipo partially based on information contained in the audits reviewed by Reuters.
In a joint statement, the U.S. Overseas Private Investment Corporation (OPIC), the International Finance Corporation, the Inter-American Development Bank, Germany’s KfW, Norway’s DNB, and Chile’s Banco de Credito e Inversiones, which all back Alto Maipo, said all “deviations” were identified before becoming significant problems and that environmental management had followed “a positive trend.” One bank, Itau Corpbanca, did not respond to requests for comment. Banco del Estado de Chile declined to comment.
The project also highlights the problems that international companies face building complex energy mega-projects in Latin America, especially when less invasive sources such as wind and solar are becoming cheaper, in some cases undercutting prices offered by hydroelectric and fossil fuel producers.
In recent years, the Alto Maipo project has faced a number of economic challenges, as well as environmental ones: Chilean power prices have plummeted since Alto Maipo obtained financing in 2013, due in part to a wind and solar power boom.
Alto Maipo is already under the spotlight after AES Gener, a subsidiary of AES Corp, announced in late July that it had technically defaulted on over $600 million of debt amid cost overruns.
In August 2016, AES Gener said Alto Maipo would go over budget due to construction difficulties. And in January, Chilean mining company Antofagasta, which held a 40 percent minority stake in Alto Maipo, exited the project.
In June, AES Gener dismissed CNM, which caused additional cost overruns, and AES Gener has said it may walk away from the half-completed project if acceptable refinancing terms cannot be reached.
The friction over the project also comes as the Overseas Private Investment Corporation (OPIC), a U.S. government agency backing the project with over $250 million of loans, undergoes a government audit for almost $1 billion of financially shaky investments throughout Chile.
OPIC said in a statement that its loans in Chile are structured in a flexible fashion so as to ensure solvency in the long-term. The agency added that the vast majority of loans in its global portfolio have been paid back in full.
Reporting by Gram Slattery; Editing by Christian Plumb, Toni Reinhold